Making tax fair and equitable

One obvious, and fairly straightforward, fix would be to increase the maximum amount of the Working Credit so that people can keep their benefits for a longer period when they start work. Another straightforward change would be to allow income support recipients entering employment to retain their Health Care Card for 12 months after job entry.

For public housing residents, links between rents and incomes should be removed, or at least not increased while income support is being withdrawn. Public housing waiting list assessment criteria and processes also need to be reviewed, as Dockery et al (Housing Assistance and Economic Participation National Research Venture 1 Final Report, Australian Housing and Urban Research Institute, 2008) show that current state policies in this area are leading to people getting locked on welfare.

Finally, there is a need to remove the discrepancy between allowances and pensions for those of working age. Unless all allowance payments are brought up to associated pension rates, an expensive and unlikely outcome, this requires structural reform.

A progressive lifelong savings approach to asset building

The third key priority for reform is in relation to asset building policies. The Australian government currently invests significant amounts of revenue to encourage people to save and invest and build their asset base. Major investments occur through the tax perks provided to superannuation investments, tax exemptions on owner-occupied housing and concessionary treatment to other longer term investments.

However, as the majority of asset building initiatives are provided through tax concessions, rather than through direct spending initiatives, they are of most benefit to high income individuals and families.

This is most apparent in relation to income invested in superannuation, which in most cases attracts a flat rate of tax of 15 per cent on funds at entry and 15 per cent on the annual income earned. As the Henry tax review has found, this is grossly inequitable with 37 per cent of the $25 billion worth of concessions going to the top 5 per cent of income earners. This inequity is unlikely to have an efficiency trade-off either as the concessions are largely going to people who would have saved anyway and who would be unlikely to be eligible for the age pension in their absence.

The government is aware of this problem and introduced some minor changes in the recent budget to begin reigning in these grossly inequitable concessions. But it has by no means gone far enough.

A more progressive lifelong savings approach is needed. Support needs to be targeted to those who most need it and are most likely to respond to it. And the focus needs to expand from one which only focuses on saving for retirement incomes to one that also considers a broader range of assets and savings needs throughout the life course. A lifelong savings approach would distinguish between three forms of saving:

1. saving for long term goals (i.e. retirement incomes);
2. saving for mid life needs such as housing and lifelong learning; and
3. saving for short term needs.

Saving for long term goals can be thought of in terms of our superannuation system. However, in order for it to be more equitable and more efficient there is a need to replace the current tax concessions for superannuation with a more fully developed government co-contribution scheme, which better targets those on low to middle incomes. This requires that all income going in to super and fund earnings be taxed at the individual’s marginal tax rate and the existing superannuation co-contribution scheme be abolished.

Government support for superannuation would however continue, not through tax concessions, but rather via a direct co-contribution matching both compulsory and voluntary contributions up to an annual ceiling. This ensures that everyone receives some form of government support, but that those on low incomes receive a much larger contribution as a proportion of their income. This approach to superannuation concessions has been long advocated by ACOSS on behalf of the community sector.

Saving for mid life needs such as housing and lifelong learning could be achieved by enabling individuals to access their superannuation funds for other important mid life needs such as home ownership or for education, as is the case in the Canadian Registered Retirement Savings Plans.